In mid-1997, China signed a contract to construct a
2,000-mile pipeline from Atyrau on the Caspian Sea to Urumchi, the capital of Xinjiang.
The project was put on hold after the bottom dropped out of the oil market last year, but
when President Nazarbaev met with Chinese officials last month they discussed
kick-starting it again.  Perhaps the greatest impediments to construction are
socio-political ones. There is inter-ethnic tension in Xinjiang between the native Uyghur
population and the ethnic Han Chinese whom Beijing encourages to settle in the region.
Kazakhstan has also indicated its increasing discomfort with the possibility that Chinese
workers sent to build the pipeline might not return to China after its completion.

It was indeed a disagreement between Kazakhstan and
China over the nationality of the workforce that stymied the project's implementation even
before the price of oil plunged last year. The prospect of young unmarried Chinese males
remaining in Kazakhstan is not appealing to the Kazakhstan government. Already large
numbers of Chinese have immigrated and live illegally in Kazakhstan, buying land, taking
up jobs and marrying local women. Most young male Kazakhs do not appreciate further
competition from Chinese oil-workers.  

Aside from disagreements over the pipeline’s
workforce, administrative problems also confront the project.  China maintains a
controlling interest over the Kazakhstani oilfields that are involved in the project and
that have estimated reserves totaling 5 billion barrels. While the clock is ticking on the
construction schedule specified in the contract, the design for its realization remains
unclear and logistical issues are far from settled.

Two economic problems make it still more unlikely
that this pipeline project will go forward. Despite vaunted hard-currency surpluses, the
Chinese National Petroleum Company has been told to operate the project on a for-profit
basis. There is, in fact, a lack of investment capital for the pipeline and no clear
source of financing. Even at current oil prices, it is difficult to make an economic
justification for the pipeline.  The greatest problem facing the pipeline for
Kazakhstan is how to export the oil out of the region and for China it is how to bring the
oil to China should the pipeline not be built. As the pipeline is not likely to be built,
China and Kazakhstan will have to look towards alternate solutions.

Dr. Robert M. Cutler is a Research
Fellow at the Institute of European & Russian Studies at

Carleton University in Montreal, Canada.